Are we over-doing the pessimism thing?
Earlier this year – on St Patrick’s Day (March 17) to be precise – the American newspaper USA Today published a poll in which 76 per cent of those asked declared their belief that the United States was in a recession. Overall, the poll found the population of the United States deeply pessimistic about their economic future.
The newspaper also quoted David Wyss, chief economist at Standard & Poor, who said that ‘recessions are almost always crises of confidence, and that’s what we’re having right now’. And Barack Obama, then just one of two frontrunners for the Democratic nomination for the Presidency, declared that it was necessary to ‘restore the public’s confidence in the market’.
Assessing the role of confidence (or lack of it) in a recession is tricky. Does a failure of confidence by the general public contribute to or even cause a recession, or is it just a symptom or a consequence of one? When we broadcast our despair at economic developments, are we just commenting or are we engaging in self-fulfilling prophesies? John Maynard Keynes was of the view that pessimism could cause recessions, and other economists have voiced similar views.
It is hard to disentangle all the elements of the economic tornado that has spun through the world in 2008, but it is unlikely that it has been getting its velocity entirely from pessimistic consumers and citizens, or even pessimistic businesspeople. We know that it all began with the credit crunch, and we know that this in turn was stimulated by some very questionable practices in the global banking community. But on the other hand, is that all? Probably not. Other factors have been at work, and a key one has been the decline – collapse, almost – of confidence and the growth of pessimism.
In Ireland pessimism, particularly of the rather irritating ‘I-told-you-so’ variety, is rife and has been for some months. It can be heard from the media, from the Oireachtas, and from the man propping up the bar. We are collectively frightening each other into surrendering our belief in the future, and because we believe what we are telling each other, our actions in the shops and at work reflect that and serve to exacerbate the problem we face. Over the past week or so, I have lost count of the number of times I have heard or over-heard conversations about the sheer hopelessness of our situation and the certainty of further disaster.
It would be silly to deny that we have a problem, in Ireland and indeed in the world. But maybe the time is right to stop complaining about it and to get on with doing something about it. Every recession has opportunities also, and Ireland may be well placed to exploit some of these. So let us get into planning and maybe give all the moaning a rest. Let us feel, express and therefore restore some confidence. Let us be imaginative and entrepreneurial, and let us work together.
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University Blog 
December 7, 2008 at 2:35 am
I agree that consumer attitude and consumer confidence play a key role in both the depth and duration of recessionary economic times. It’s difficult to solve this, as the media thrives on negative stories that serve to further aggravate our fears. It is said that people are motivated primarily by fear of loss and prospect of gain, of which fear is the more powerful of the two. Does the media bear a responsibility to the people to at least reflect a balanced approach to it’s reporting on the economy? Even in the midst of a downturn, there are positives, the current price of gas, for example. I don’t believe this is being treated with the same sensationalism that rising gas prices did. With regards to pessimism, “doubters get their proof first”. Though for many of the “I told you so” types, their confidence must have been ebbing in the midst of what was close to a 14 year period of economic expansion. At the end of the day I believe that through innovation the guiding principles of Adam Smith’s “invisible hand” will always create more opportunities for prosperity than demise.
December 7, 2008 at 10:38 pm
except such past models of analysis about confidence now need to be thrown out the window. for an economist to say this is a crisis of confidence is pure BS. confidence in what? the ability to get one’s hands on more easy money?
this recession is fundamentally caused by a complete mispricing of risk globally, and in the irish case a touching faith in the selling houses in the backend of beyond to each other as a strategic to keep creating wealth just makes it worse.
so if anything the recession was caused by overconfidence. realism and change might get you out of it. brushing your teeth with coldgate won’t.
December 8, 2008 at 12:47 am
Ultan makes an excellent point about the cause of the recession – due to poor evaluation of risk in market pricing models, which would make previous consumer confidence models irrelevant. In managing the depth and duration of the recession though, I still believe consumer confidence will have an impact.
December 8, 2008 at 12:34 pm
I think it’s all rather more subtle than Ultan suggests. Of course the root cause of the recession lies in the behaviour of the financial institutions. Their troubles in turn have turned off the tap providing capital to industry, and in particular small business.
But that’s not the whole story. The extent of the recession now developing is far greater than the above cause would suggest. This is in part driven by confidence. Consumers are wary, given all the news items, and are not spending, and this has a domino effect in economic terms. Furthermore, it may keep the recession going far longer than necessary – the financial institutions will be sorted in due course.
December 8, 2008 at 9:39 pm
I feel it’s also the problem of the population who tolerated the banks behaviour because it suited them too. Consumers saying it’s “the banks” fault is a bit like an alcoholic blaming the barman for giving her too much/too little alcohol. Acceptance of this, a good deal of humility, and a sense of personal responsibility might change the situation.
I haven’t seen many going around saying “I told you so” at all or a pining for change either. On the contrary, just a lot of denial and BS …and the triumph of hope over reality that we will soon return to the good old days and continue just like before, addicted to property and easy credit while pricing ourselves out of the market for investors and jobs…
I would agree there’s some analysis needed at the psychological level, and economists miss this. But fundamentally the mass psyche here needs to change to one of realism, productivity, planning, and frankly a good deal of cop-on about what this country’s position in the world really is.
December 9, 2008 at 9:55 am
There is an interesting perspective on the impact of fear on decision-making and risk-taking during a recession here:
http://www.nytimes.com/2008/12/07/jobs/07pre.html?_r=3
December 10, 2008 at 4:20 pm
“It was a mirage fabricated by other people’s money. There was no miracle; it was an overdraft.”
http://www.independent.ie/opinion/columnists/david-mcwilliams/brace-yourself-now-for-the-deckland-depression-1568876.html
I could read these stories all day until the denial stops!